How the Government Shutdown Will Hurt the Economy

A Park Service worker puts up closed signs on a barricade in front of the closed Lincoln Memorial in October 2013.
Photograph by Mark Wilson/Getty Images

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The shutdown could be economically significant—if it lasts long enough.

It has been nearly four weeks since the U.S. federal government shut down. The most obvious consequence for the economy is that roughly 800,000 federal workers are not being paid. Some have been furloughed in a form of involuntary time off, while others are essentially being forced to work without pay.

In 2017, the last year for which we have comprehensive data, federal civilian employees were paid about $340 billion in wages and benefits, or a bit more than 3% of all employee compensation. (Most service members are still being paid, with the exception of the Coast Guard.) That is comparable to the total pay of workers in sectors such as media, technology, restaurants, and transportation.

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Researchers studying the last shutdown, which was in 2013, found that federal workers responded to the lost income by cutting their spending by 10%. Workers who were furloughed cut their spending by nearly 20%, because staying home allowed them to save money on expenses such as food, gas, and child care.

The spending cuts were so large because federal workers, like most Americans, have relatively little liquid savings and were either unable or unwilling to borrow enough to cover the difference. Once the shutdown ended and federal workers were repaid for their lost time as part of the subsequent budget deal, their spending spiked. The net result was that consumption was mostly postponed rather than depressed.

If federal workers spend about 70% of their gross compensation on goods and services (in line with the economy-wide average), the direct effect of the shutdown would therefore be a decline in consumption of roughly $24 billion at an annual rate relative to what it otherwise would have been, implying a hit to growth worth roughly 0.1% of gross domestic product. That should eventually be offset by the post-shutdown spending spike as federal workers get paid what they are owed.

There are at least three other reasons, however, to think the cost of the shutdown could be significantly higher, especially if it continues to drag on.

First, federal workers who spend less deprive other workers and businesses of income, which will reduce aggregate consumption and investment even more. The overall impact is difficult to estimate, but it is significantly greater than zero. Moreover, those workers and businesses will not get repaid in full once the shutdown ends, which means they, unlike federal employees, are facing a permanent loss in income.

Second, federal workers might respond to the increasing frequency and length of shutdowns by increasing their precautionary saving. Job security is supposed to be one of the main benefits of working for the government. Pay is lower than in the private sector for the best-educated workers, but federal employees benefit from far lower job volatility than they would get outside the government. Randomly depriving these risk-averse workers of pay should cause them to spend less and save more than they otherwise would. Holding a large buffer of liquid assets could become as necessary as a security clearance for hundreds of thousands of workers. That would depress long-term growth, albeit not by very much.

The biggest cost of the shutdown could come from the fact that useful services are no longer being provided to the private sector. Official statistics are not helpful in measuring these costs. U.S. farms and utilities only account for about 2% of total economic output, for example, but it is safe to assume the hit to living standards would be much larger than 2% if Americans suddenly lost access to food, water, electricity, and heat. The shutdown has already affected the federal government’s ability to monitor food safety, approve cross-border mergers, grant telecom licenses, and keep planes in the air.

American society is resilient enough to withstand temporary government shutdowns. They are recurring events and their impact has historically been limited outside the Washington, D.C., metro area. Sustained cuts in pay and public services, however, could end up proving far more damaging.

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